Mark Magaletsky: We learned about all the charms of corporate wars and trials

EBRD senior banker Mark Magaletsky talks about railcars, investments, trials, corporate wars and domestic pets.
Olga Bystritska 07 March 2017 16:42

- Pushkin? I ask in surprise.

- Yes, a Shih Tzu dog. Its name is Pushkin.

Mark laughs when talking about his pet. However, in general, like most bankers, he is reserved and rather formal, answers questions concisely, and does not like to talk about himself.

It is true that I am an introvert, says Mark Magaletsky, a senior banker with the European Bank for Reconstruction and Development, which is the largest investor in Ukraine. He agreed to an interview for this column only on the condition that he would not have to respond to the traditional set of questions about his personality.

Former minister of infrastructure Andrii Pyvovarskyi focuses on the professionalism and experience of Magaletsky. "He has been involved in infrastructure projects in Ukraine and its region for a long time, and he is very versed in the details. He possesses a wealth of information. When we discussed the Kyiv-Znamianka project, he knew every detail," Pyvovarskyi said, describing one of Magaletsky’s qualities. His younger brother, Konstantin Magaletsky, who is also a successful banker, said that Mark was an example for him in everything. "I largely followed in his footsteps: I graduated from the same university, worked in consulting, and I now work in finance… I named my eldest son Mark in his honor," Konstantin said.

Despite his reserved nature, Mark said he was interested in history in his childhood, which is why he likes historical literature and fiction. "I am currently reading a book that Andrii Stavnytser gave me. It is entitled “The Hare with Amber Eyes." It is about members of a nineteenth-century Odesa family, who were grain traders and became very big players on the market. Some members of the family moved to New York, some to Paris and London... I am still reading it, so I do not know how it ends," he said.

Since 1993, the EBRD has provided nearly EUR 12 billion for various projects in both the private and public sectors in Ukraine. However, companies go to the EBRD not just for money, but also for the reputation and the "protection." Projects funded by the EBRD can be automatically considered successful, although there have been failures, and Mark does not hide this. He also speaks openly about the fact that the EBRD is one of the main lobbyists in the transport sector, particularly for reform of the corporate governance of state-owned enterprises, the concession law, and inland waterways.

Magaletsky discusses how the EBRD has essentially become one of the top five largest private owners of railcar fleets in Ukraine, the criteria that companies must meet to obtain funding from the EBRD, and the recipe for resolving the rail "tariff war," and future trends in an interview for the CFTS portal’s "People of Business" series.

2  

The EBRD is one of the main lobbyists for reforms and not only reforms the transport sector

On lobbying and reforms

The EBRD is one of the main lobbyists for reforms and not only reforms in the transport sector. One of the fundamental tasks of the bank as an institution is to facilitate transformation of the market economy in Ukraine, through both funding and promotion of various types of reforms. In this sense, we work with the Ministry of Infrastructure, state-owned enterprises, business associations, and all people of goodwill that play one role or another in the industry. Some examples are reform of the state-owned enterprises, the concession law, introduction of electronic tickets and contracts for public services in public transport, long-term road maintenance contracts based on output and performance, reform of the inland waterway sector, introduction of FIDIC contracts, etc.

3

We do not have a simple list on which we can tick boxes and say "goodbye" to those that fail to make the list

On money and a complex process

In one sentence, they are conscientious investors (Mark is speaking about the companies to which the EBRD is ready to provide funds). We look at companies that are leaders in their industries and have good financial indicators, investment projects, and a good business reputation. We do not have a simple list on which we can tick boxes and say "goodbye" to those that fail to make the list. It is a complex process that is not very easy to describe.

It is impossible to compare public and private companies. We work with both not because it is easier to work with one than the other... We focus mainly on private businesses, but public companies are dominant in some sectors. For example, Ukravtodor is dominant in the road sector and Ukrzaliznytsia in the rail infrastructure sector. Transportation is one of the sectors in which state-owned companies dominate, although the share of private companies is increasing. In the 1990s, almost all the projects in the transport sector were public projects. With the exception of the shipping industry, the picture is now changing... In general, the bank prefers to have a proportion of 70% private sector and 30% public sector. However, there are significant proportions of public projects in the transport and energy sectors.

4

We hope that the subway in Dnipro will cease to be the shortest subway in the world

On ports and a tunnel

The vast majority of our projects are successful and many of them are the first of their kind. For example, construction contracts based on the FIDIC model were first used in the road and rail sectors under our projects 15 years ago. The second example is long-term contracts for maintenance of roads, the so-called OPRC (Output- & Performance-Based Road Contracts). We are implementing it on the Stryi-Brody highway in conjunction with the State Automobile Road Service (Ukravtodor).

In the port industry, we are financing new-generation projects involving grain terminals in the Odesa seaport (with the Brooklyn-Kiev and Olimpex Coupe companies) and, in the future, in the Yuzhny seaport (with M.V. Cargo). Our project essentially represents a 50% increase in the capacity of the subway in Dnipro. We hope that the subway in Dnipro will cease to be the shortest subway in the world. When we agreed to work on the Beskydy tunnel, even the old timers could not remember the last time a tunnel was built in Ukraine... The one that exists now was built in 1881.

4  

With this fleet of 2,387 railcars, we are essentially among the five largest private owners of railcar fleets in Ukraine

On corporate wars and railcars

One of our projects involves financing purchase of railcars by the Interlizinvest private rail operator. The company failed to fulfill its loan-servicing obligations. Because this this continued over a long period and there was a conflict among the company’s shareholders, we decided to quit the project together with the freight cars that the company transferred to us as collateral. It was a difficult story. We learned about all the charms of corporate wars and trials. We are already approaching the finish line and we have obtained ownership rights to these railcars. A subsidiary company has been created. It is the holder of the railcars. For now, the railcars will work for us directly. With this fleet of 2,387 railcars, we are essentially one of the five largest private owners of railcar fleets in Ukraine.

We will invite professional companies to operate the railcars, but we plan to sell them in the future. Currently, the market environment for that is not very good. Therefore, our task at this stage is to fully ensure control over the assets, launch them into operation, and seek opportunities to sell them in the future... This is not our business. Everyone should mind his own business business.

There have been projects that we have been unable to implement. An example is the project for reconstruction of the berths Nos. 7, 8, and 9 at the Chornomorsk seaport and creation of a new cargo transshipment complex based on these berths. The project documentation was signed and its implementation had even begun, but the management of the seaport decided to stop its implementation, saying that its plans had changed and that other solutions had been found. Therefore, work on the project stopped at the stage of tenders, when a full package of funding had had already been allocated for the project. We have no problems with the seaport because they settled with us in full... However, the project remains unimplemented and some of the berths have been taken out of operation.

5  

We can eat everything with only a spoon or only a fork, but you will agree that it is more convenient when both are available

On grain terminals and concession

It is probably too early to talk about oversupply of grain terminals, but further investment in such projects will depend on how production of agricultural goods increases in Ukraine and, accordingly, the export dynamics. In addition, we should not forget that the qualities of the port facilities in Ukraine vary very significantly: from the newest terminals that use the latest technology to the terminals that were built during the reign of Tsar Gorokh and do not meet today's requirements for quality or speed of cargo handling.

Work on legislation and government policy in the area of concession began in July, and it is now entering the home stretch. We expect the concession policy and the draft law to be formulated in the first quarter of this year and submitted for public discussion. The idea is to replace the four existing concession laws with a single law and fit it into the existing legislative framework to ensure that it is in harmony with the rest of the legislation.

However, I would not say that the fact that we are working on concession means that we prefer this mechanism to privatization or other forms of public-private partnerships (PPP). The first, the second, and the third are all methods of involving private businesses. Concession or privatization may be suitable, depending on facility and industry. It is important for businesses and the government to have these tools at their disposal. We can eat everything with only a spoon or only a fork, but you will agree that it is more convenient when both are available.

We support concession as a form of PPP in general. However, the extent to which this tool is currently realistic in the Ukrainian road sector is difficult to say... We have not yet seen good projects with serious intentions by investors. Regarding concession, now is not the best time to begin concession road projects because such projects are quite capital intensive. It is not the most rewarding task in the current investment climate and the perception of Ukraine among investors and creditors.

6  

We want cheap transportation on the one hand and the latest locomotives, passenger cars, and bridges on the other hand

On tariffs and transparency

(We ask Magaletsky whether there is a recipe for ending the constant war over tariffs) ...It has always existed and will always exist. It is understandable that road users will want lower tariffs and roads will want higher tariffs. What are the reasons for such discussions in the rail sector? Transportation by rail accounts for a significant share of the costs of many businesses in Ukraine. What has exacerbated this issue in the past year or two? The market conditions in the mining and metals industry. Mining and metals companied naturally become more sensitive to any change in their cost components if prices of steel or iron ore fall. On the other hand, railways also have great needs in terms of operating costs and capital investments. Here is what happens: we want cheap transportation on the one hand and the latest locomotives, passenger cars, and bridges on the other hand.

Therefore, the discussion is going nowhere. Firstly, it is important to have transparency from Ukrzaliznytsia in terms of provision of information about the components of tariffs and the reasons behind one position or another regarding operating costs and capital investments. Maximum transparency will reduce the intensity of emotions. Secondly, clear plans and their implementation are important: “Look at this money, we are doing this and that, and this is the result over time.” Thirdly, regulation of tariffs by a separate body (the National Transport Regulation Commission), and this issue has been under discussion for a long time. However, it is not enough to have a commission. It must be a fully-fledged and competent regulator. After all, businesses are willing to pay if they understand that their funds are being used as efficiently as possible.

7  

Regarding future trends, many projects can be united under the concept of green logistics

On loans and future trends

We have learned from experiences. Yes, we will continue to provide loans to companies for purchase of railcars despite our experiences. However, the situation regarding the type of rolling stock is currently varies significantly, and it will vary significantly depending on Ukrzaliznytsia’s decisions regarding maintenance of its railcar fleet. This is because large numbers of railcars, including Ukrzaliznytsia’s entire, are subject to write-off in the next few years, and the question is how Ukrzaliznytsia will renew the fleet and how the situation on the market will develop as a result.

We are open to all good projects, both public and private. However, regarding future trends, many projects can be united under the concept of green logistics. For example, electrification of the Dolynska-Mykolaiv-Kolosovka railway, the subway in Kharkiv, many overland electric transport projects (for example, the tram to Sykhiv in Lviv), development of inland waterways, and partial replacement of the Ukrposhta postal agency’s fleet with electric vehicles.

8